Uncooking the books: good advice from the street.com guys at yahoo chat:
thestreet.com
Market Features: TSC's Cracking the Books Chat Transcript
By Yahoo! Chatters
9/28/98 6:41 PM ET
Senior News Editor Lee Montgomery and Senior Writer Alex Berenson chatted on Yahoo! about TSC's accounting series, Cracking the Books. The unedited transcript follows:
Alex_TSC: The Accounting Series chat begins in 35 minutes -- send in your questions now!
TSCEllen: Curious about certain companies' accounting methods -- including Kellogg, Cisco and others?
Then join TSC's Lee Montgomery and Alex Berenson for a chat about the perfectly legal means companies use to use to suppress their expenses and enhance their earnings?
Just 15 minutes until the chat begins, so send in those questions!
Check out TSC's Cracking The Books series at www.thestreet.com.
If you want find out about future TSC chats, send in your email address as a question. You should receive email updates about future Yahoo!/TSC Chats!
Or simply send your email address to lpoynter@thestreet.com.
Five more minutes until the chat begins -- send in those questions!
Lee Montgomery is the Senior News Editor and Alex Berenson is Senior Writer. They will be taking your questions on companies' questionable accounting.
Without further ado ... Lee and Alex...
Alex_TSC: Hello ... I'm Alex Berenson.
Lee_TSC: Has everybody seen the Cracking the Books series on TheStreet.com?
Alex_TSC: Looking forward to taking your questions.
Exocytosis asks: Are there sectors that have a higher frequency of accounting problems?
Lee_TSC: Etertainment, software ... companies ...
Alex_TSC: Companies that have fewer hard assets.
Lee_TSC: ... that do a lot of acquisitions.
Exocytosis: What are some companies that have perfect books?
Lee_TSC: Nobody has perfect books, but in general, the more conservative the company, the more conservative their accounting.
Also, look for companies that have a high proportion of institutional shareholders -- they tend to be the watchdogs on these matters.
Alex_TSC: Often, big drug companies are very conservative.
Azhoops: Unless you are an expert in accounting, and in addition, very knowledgable in a particiluar industry, how does an individual have a chance in the markets?
Alex_TSC: Read TSC.
Lee_TSC: And look for big differences between reported earnings and cash flow -- that's where problems really show up first.
Alex_TSC: As Lee says, cash flow is an important indicator of a company's health -- because it largely can't be faked.
cryo104 asks: What's your favorte book
Alex_TSC: Entertainment industry economics, by Hal Vogel
Lee_TSC: The analysis and use of financial statements, by white, sand, Fried
Exocytosis: Which large cap company has the best accounting record?
Alex_TSC: Many have good records -- wouldn't want to name one as the best.
Lee_TSC: intel is very straight on its accounting, but GE, for example is not there's a new statement of comprehensive earnings that's required this year that shows how bad coke is
amyolm asks: Do you think accounting practices are gernally better or worse than 20 years ago?
Lee_TSC: definitely worse
Alex_TSC: agreed -- there are more tricks than ever before
esbarr asks: Can the market really see through goodwill amortization's effect on earnings? many companies do backflips to pull off poolings...
Lee_TSC: you can, by the use of a measure that takes it out klike EBITDA, but
Alex_TSC: But be careful not to buy into EBITDA as equivalent to free cash flow, because interest and taxes are real charges
lslea asks: Is cash flow equal to EBITDA?
Alex_TSC: See the response to the previous question EBITDA ignores many charges a company MUST pay if it wants to stay in business
Azhoops: Do most money managers and analysts have the skills to do the proper accounting work? How can a 28 year mutual fund manager have industry experience? This baffles me!
Lee_TSC: we agree, many of them really don't. They rely entirely too much on screening of standardized financial data that overlooks many of these issues. That's why the shares of the abusers fall so much when theyre exposed
Exocytosis: You mentioned MSFT as one of the companies with high options costs, is that thier only accounting problem you see that concerns you about MSFT?
Alex_TSC: Yes in fact MSFT is very conservative in accounting for revenue
Lee_TSC: they also keep an enormous number of projects off the books, until Bill chooses to reveal them, So you really don't know the company's true earnings power--although, so far, that's only helped the stock
Alex_TSC: Lee and I disagree on this one, I guess... how so, Lee? how, that is, do they keep projects off the books?
Lee_TSC: promising projedcts that are in deveklopment are wrapped up under SG&A or R&D
you can't tell what they're about
Swiss_Buffett asks: Generally, if a software co. has "Deferred Rev" on the Liab side, you like that or not?
Alex_TSC: Yes. Deferred revenue is income that the company has chosen not to recognize...
Lee_TSC: we like it--it means they're being slow to recognise revenue
amyolm asks: So much seems to depend on whether you can trust the company or its accountants. What can be done to increse visibility for investors?
Lee_TSC: its hard, the tighter you make the rules, the more the accountants can get around them. again, get back to the difference between cash flow and the earnings
Ooga_Chaka_Baby asks: What was the outcome of the TeleSave debacle? Is that where the crack the books series originated from?
Alex_TSC: Tel-Save is still ongoing -- I'm continuing to report... Wait for more stories...
sanghani1 asks: Hello Alex, is Coca-cola's accounting system regarding how they shift debt to CCE a proper basis for evaluating their earnings?
Lee_TSC: no--it keeps coke a low debt, high return on assets company. meanwhile, CCE gets saddled with all the high cost assets.
Alex_TSC: Jesse Eisinger, one of our writers, came up with the idea after noticing the number of companies with accounting problems.
Lee_TSC: but the two are intertwined--the one can't live without the other.
dynasonic asks: Does the role of the external auditors need to change to restore investor confidence in certified financial statements?
Lee_TSC: yes, the auditor is a loss leader for the more copmplex work, so the auditors tend to be yes-men. they are also woefully understaffed for the job
Alex_TSC: auditors definitely need to take more responsibility... they may need to be held liable in cases of serious fraud something that rarely happens now
Swiss_Buffett asks: Sorry, what stands CCE for ?
Lee_TSC: CCE is Coca Cola Enterprises,
amyolm asks: Do new industries - such as the companies tied to the Web - find new ways or tricks to hide their problems?
Alex_TSC: It's not that simple -- sometimes new industries create new accounting issues options, for example, are relatively new and yet a big part of compensation in tech
Lee_TSC: yes--they call it massive losses, but the stocks are up so much nobody notices, until they fall
Exocytosis: Dose DELL's aggresive buying back of shares worry you guys?
Lee_TSC: no, I love it
Alex_TSC: No
sanghani1 asks: What about the lack of transparency in emerging markets. Do US forms typically take advantage of such a situation?
Lee_TSC: no, US firms don't, but foreign firms do, and the fact that they are trasded here as OTC adrs is creating increasing problems
Exocytosis: TWX seems to be one of those companies with incredibly complicated accounting, what does one do if they are interested in investing in a company like Time Warner?
Alex_TSC: Good question... there is no easy way to sort through TWX's financials
Lee_TSC: you'll never understand the true state of affairs with TWX just from their accounting
Alex_TSC: analysts are aware of this and have asked the company for more information, but as long as the stock price is high, the company has little incentive to respond
gonchvolant asks: It seems like if you avoided every company with an accounting prob, you'd never invest. How do you deal with that?
Alex_TSC: Some companies are better than others options, for example, aren't terrible -- but serious accounting issues are a red flag
Lee_TSC: that's not so--you have to use accounting as a basis of honesty in a relative sense
Alex_TSC: like recognizing non-existent revenue
Lee_TSC: Charles Allmon said it best, if you catch them doing it once, they'll do it again.
Swiss_Buffett asks: Do you have any rubs with accounting at DIS ?
Alex_TSC: Not terrible, but not great They don't make figuring out their operations easy but they're relatively conservative about movie accounting
gonchvolant asks: What are some companies that have recovered their repuations and their stock valuations from accounting scandals?
Lee_TSC: I don't of any
Exocytosis: Does buying back shares fix the problem of writing options for employees?
Alex_TSC: No -- those are two different issues
Lee_TSC: yes, in part, because it minimizes the dilution problem.
Alex_TSC: buying back shares is good, because it limits the share base.
Lee_TSC: If you look at the accounting series, there are a lot of recurring problems with pretty basic things--
Alex_TSC: But handing out options is an expense that should show up on the balance sheet
Lee_TSC: accounts receiveable that are high relative to sales
Alex_TSC: negative cash flow and positive reported earnings
Lee_TSC: and companies that are taking really large extraordinary writeoffs so the average individual can souse many of these situations out on a common sense basis
gonchvolant asks: why doesn't the media - other than TSC - cover accounting more rigourously?
Alex_TSC: because it's hard, and most reporters failed math
Exocytosis: You mention CSCO's options problem, but what about their aquistions spree, any worries there?
Lee_TSC: accounting is a skill that you have to build up yes--you cannot judge cisco on a same-company sales basis--meaning, those operations they have heald for more than 12 months. So any acquisition looks incredibly successful
Lee_TSC: because it merely adds to earnings.m
Alex_TSC: although it may be dilutive on a per-share basis
Lee_TSC: Whats more, see Jeff Bronchik's column to show how cisco could buy a barge company and increase
Azhoops: Is there a document that spells out the different items for SG&A? I assume a CEO's lear jet can be buried in that line item
Lee_TSC: its earnings, simply because of its high P/e> oh yes
Alex_TSC: Unfortunately, there isn't.
Lee_TSC: the lear jet, I mean look at the manamgement's discussion and analysis, it will give you a cvlue
Ooga_Chaka_Baby asks: The Albert Meyer piece, Isn't that the job of an analyst? To report what they see? Whether good or bad?
Alex_TSC: In theory, yes. In reality, analysts face many different pressures. they don't always decide in favor of honesty
gonchvolant asks: If a company is listed on the NYSE, does that mean their accounting is going to be better than an AMEX company? Do the exchanges play any role?
Lee_TSC: it shouldn't, but in fact, the Amex's listing standards are considerably lower than NYSE-- it was the AMEX, for example, that alloweed the A supervoting shares to develop which wass a scandal
Azhoops: How can you find out about "off balance sheet" deals, such as private placements that can impact future operations of the firm
Alex_TSC: if the company chooses not to disclose them which it usually should you can't however, stock placements will show up when a company lists shares outstanding in an SEC filing
Clunshadi asks: Do companies have the choice of when to "realize revenue?"
Lee_TSC: yes, lots of leeway, and none of it good
gonchvolant asks: Is David Faber the shortest financial reporter ever?
Alex_TSC: yes
Lee_TSC: actually no, I think Ron is shorter
Alex_TSC: yes indeed
Lee_TSC: alex and i, by the way, are both over 6'5"
Alex_TSC: about six inches tall -- the set is minaturized
Swiss_Buffett asks: What do you make of Gain on Sale accounting in some of the HLTV cos. ?
Lee_TSC: what is an hltv co?
Alex_TSC: what is an HLTV
Lee_TSC: not likely--
gonchvolant asks: Could a Bre-X happen in the U.S.?
Lee_TSC: not likely
Alex_TSC: possible
Lee_TSC: it would be something else
Alex_TSC: any company with foreign ops can fake them if it really wants to
Exocytosis: What are some sectors that tend to have good book keeping records, or is that a company to company basis only?
Lee_TSC: drug companies tend to be good,
Swiss_Buffett asks: HLTV... High Loan to Value loans... Greentre Financial, Firstplus Financial for example.
Alex_TSC: gain on sale is a recipe for disaster
Lee_TSC: we think its guessing with the future, and impossible to estimate
Alex_TSC: it encourages/forces companies to book profits up front, without
Lee_TSC: the fact that so many opf the hltv companies use the most aggressive estimates is a problem.
Alex_TSC: rationally considering what default rates are likely to be
DowTenThousand asks: What problems do derivs pose for a/cs???
Lee_TSC: its a huge problem for banks and wall street firms that do a lrage book of swaps business
Alex_TSC: the risks can be nearly impossible to quantify -- until they blow up
Lee_TSC: but efforts to make these companies report are also misguided, i think because the qtrly earnings will become very volatile
Alex_TSC: it's a very tricky issue
Clunshadi asks: Where can the average investor get a good lesson on accounting reality and not theory?
Lee_TSC: or call the Ass of Investment Management & Research in Charlottesville, VA they train chartered finanil analysts
LVLewitinn asks: What's the deal with EBITDA? Is Canada the only place that has it on their financial statements and will the SEC require it ever?
Alex_TSC: doubtful
Swiss_Buffett asks: Any comments you have on the Long Term Capital hedge fund ? These guys are bummers in my opinion.
Alex_TSC: Shows the risks of leverage
Lee_TSC: once in trouble, these things rarely recover. Its a human nature kind of thing
gonchvolant asks: Are any high-profile investors particularly savvy about accounting - Buffett?
Alex_TSC: Not Buffett... Michael Price is good, I think value investors generally are more serious and careful
Lee_TSC: Dick Weiss over at the strong funds, he does something that estimates takeover value
Swiss_Buffett asks: Yeah, sure does... and sure is... LOL !
amyolm asks: As accounting pursists, who are you rooting for Sosa or McGwire? (Did I ask that already?)
Lee_TSC: sosa
Alex_TSC: McGwire -- since he was robbed of #66 already
Alex_TSC: that's bad accounting Peace. Out. I hope everyone got something out of this.
TSCEllen: Thanks Alex and Lee! Make sure to check out TSC's "Cracking The Books" series at www.thestreeet.com
Alex_TSC: Thanks and goodbye
Lee_TSC: many thanks everyone, it was a great chat, we learned a lot from hearing your questions!
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